BILL ANALYSIS SENATE RULES COMMITTEE AB 1807 Office of Senate Floor Analyses 1020 N Street, Suite 524 (916) 445-6614 Fax: (916) 327-4478 . THIRD READING . Bill No: AB 1807 Author: Takasugi (R) Amended: 6/22/98 in Senate Vote: 27 - Urgency . SENATE REVENUE & TAXATION COMMITTEE : 5-0, 6/17/98 AYES: Alpert, Hurtt, Karnette, Knight, McPherson NOT VOTING: Burton, Greene, Kopp ASSEMBLY FLOOR : 73-0, 5/27/98 - See last page for vote . SUBJECT : Property tax: airline property and possessory interests SOURCE : Author . DIGEST : This bill codifies a county/industry settlement agreement relating to aircraft valuation and airport possessory interests. This bill is contingent on passage and enactment of AB 2318 (Knox). ANALYSIS : Existing law provides for the valuation of aircraft. However, the actual methodology for valuation has been left to local assessors. A committee of the Assessors' Association meets annually to recommend methods for valuing aircraft. However, these valuation standards are advisory, and actual valuation is in the hands of individual county assessors. Existing statute and Board of Equalization regulation precludes assessing airline use of public airport runways and taxiways. But court cases confirm assessors' responsibility to assess these possessory interests. As these issues have been particularly contentious, they are associated with years of expensive litigation of uncertain outcome. This bill is one of three bills that would codify an agreement between county assessors and airlines with respect to valuation of aircraft and valuation of possessory interests in airport landing facilities for property tax purposes. This bill provides that if aircraft are valued according to the method agreed to in the settlement, those values shall be presumed to be correct (i.e., anyone challenging the value will be obliged to prove it erroneous). The value standard would be based on the taxpayer's original cost for the aircraft, with various adjustments. The original cost is to be the greater of the following: 1.Taxpayer's cost for that individual aircraft reported in accordance with generally accepted accounting principles, so long as that produces net acquisition cost, and to the extent not included in the taxpayer's cost, transportation costs and capitalized interest and the cost of any capital addition or modification made before a transaction described in clause (2) below. 2.The cost established in a sale/leaseback or assignment of purchase rights transaction for that individual aircraft that transfers the benefits and burdens of ownership to the lessor for United States federal income tax purposes. If the original cost for leased aircraft cannot be determined from information reasonably available to the taxpayer, original cost may be determined by reference to the "average new prices" column of the Airliner Price Guide for that model, series, and year of manufacture of aircraft. If information is not available in the "average new prices" column for that model, series, and year, the original cost may be determined using the best indicator of original cost plus all conversion costs incurred for that aircraft. In the event of a merger, bankruptcy, or change in accounting methods by the reporting airline, there shall be a rebuttable presumption that the cost of the individual aircraft and the acquisition date reported by the acquired company if available, or the cost reported prior to the change in accounting method is the original cost and the applicable acquisition date. Original cost, plus the cost of any capital additions or modifications not otherwise included in the original cost, shall be adjusted from the date of the acquisition of the aircraft to the lien date using the producer price index for aircraft and a 16-year straight-line percent good table starting from the delivery date of the aircraft to the current owner or, in the case of a sale/leaseback or assignment of purchase rights transaction, as described in this section, the current operator with a minimum combined factor of 25 percent, unless this adjustment results in a value less than the minimum value for that aircraft computed to the paragraph below, in which case the minimum value may be used. If original cost is determined by reference to the Airliner Price Guide "average new prices" column, the adjustments required by this paragraph shall be made by setting the acquisition date of the aircraft to be the date of the aircraft's manufacture. For certificated aircraft of a model and series that has been in revenue service for eight or more years, the minimum value shall not exceed the average of the used aircraft prices shown in columns other than the "average new prices" column for used aircraft of the oldest aircraft for that model and series in the Airliner Price Guide most recently published as of the lien date. Minimum values shall not be utilized for certificated aircraft of a model and series that has been in revenue service for less than eight years. For out-of-production aircraft that were recommended to be valued by a market approach for 1998 by the California Assessors' Association, assessments will be based at the lower of the following: (a) The values established by the Association for the 1998 lien date. (b) The average of the used aircraft prices shown in the columns other than the "average new prices" column for used aircraft of the five oldest years for the aircraft model and series or that lesser time for which data is available in the Airliner Price Guide. In computing assessed value, the assessor may allow for extraordinary obsolescence if supported by market evidence and the taxpayer may challenge the assessment for failure to do so. To constitute market evidence of extraordinary obsolescence and to permit an assessment appeal, the evidence must show that the functional and or economic obsolescence is in excess of 10 percent of the value for the aircraft model and series otherwise established pursuant to the above formula. Specifies if the Airliner Price Guide ceases to be published or the format significantly changes, a guide or adjustment agreed to by the airlines and the taxing counties shall be substituted. In order to calculate the above values, the taxpayer is, to the extent information is reasonably available to the taxpayer, to furnish the county assessor with an annual property statement that includes the original costs as defined above. In the event the air carrier that has this information reasonably available to it fails to report original costs and additions, as requested by law, an assessor may in that case make an appropriate assessment pursuant to Revenue and Taxation Code Section 501. The bill also contains a county-by-county table of credits against future tax. The credits would range from $18.3 million for Los Angeles, $13.5 million for San Mateo, and $4.5 million for Alameda, down to $500 for Humboldt County. These credit amounts are the amounts that each of the counties has agreed to accept as its settlement amount, in order "to dispose of certain lawsuits and assessment appeals that have been filed, and to preclude the filing of other claims relating to (1) the assessment, equalization, and accessibility of certain possessory interests in publicly owned airports and (2) aircraft valuation and equalization" by 13 named airlines. The credits would be spread equally over the 1998-99 through 2002-03 fiscal years. The following are the counties affected by the bill containing the credits against future tax: Alameda ............................... $ 4,455,110 Contra Costa ........................ 1,000 El Dorado ............................ 1,000 Fresno .................................. 264,630 Humboldt ............................. 500 Kern ..................................... 33,540 Los Angeles ......................... 18,335,720 Monterey .............................. 148,560 Orange .................................. 2,916,995 Riverside ............................... 435,780 Sacramento ............................ 1,070,185 San Bernardino ...................... ,991,405 San Diego .............................. 4,262,610 San Joaquin ........................... 1,000 San Mateo ............................. 13,544,005 Santa Barbara ........................ 167,880 Santa Clara ............................ 2,369,080 Solano .................................... 1,000 The 13 airline companies mentioned in the bill are as follows: Alaskan Airlines Inc. American Airlines, Inc. Continental Airlines, Inc. Delta Airlines, Inc. Federal Express Corporations Northwest Airlines, Inc. Trans World Airlines, Inc. United Airlines, Inc. United Parcel Service U.S. Airways, Inc. Wings West Airlines Southwest Airlines America West Airlines Then bill specifies that with respect to America West Airlines only, the waiver or settlement agreement requested by the bill may exclude the claims that American West Airlines has already raised in the adversary proceedings in the bankruptcy proceedings entitled "In Re America West Airlines, Inc., Case No. 91-07505 PHX-RGM" against the Counties of Orange, San Bernardino, Sacramento, San Mateo, Alameda, and San Diego, provided that the settlement agreements or waivers provide that the resolution of any of America West's adversary claims will have no legal effect for any tax year not at issue in those adversary proceedings. States the intent of the Legislature that this bill is to facilitate recordation of the disputes over the assessment of certificated aircraft by codifying recommendations produced by a county and airline industry working group, that do all of the following: 1.Establish valuation methodology for certificated aircraft. 2.Clearly establish a presumption of correctness of county assessors follow the assessment methodology set out in this measure and in AB 2318. 3.Dispose of certain outstanding litigation and appeals over aircraft valuation. 4.Mitigate the financial impact of the statutory charge on local governments and schools by establishing a method by which the issuance of any prior years refunds to litigating airlines would be treated as credits against future tax payments. States AB 1807 is to become operative only if AB 2318 is enacted and becomes effective on or before January 1, 1999, and in that event is to become operative on the date of the effective date of the bill and the effective date of AB 2318. Three-Bill Package AB 1807 (Takasugi) and AB 2318 (Knox) are products of lengthy negotiations between counties and the airline industry over the valuation of airline real property interests in publicly-owned airports (possessory interests) and airline personal property aircraft. Those bills codify the recommendations of a county/airline industry working group. Jointly, these measures establish valuation methodology for these possessory interests and personal property which are presumed correct. In addition, they dispose of outstanding lawsuits and assessment appeals estimated at nearly $250 million. In exchange for dismissal of pending lawsuits and assessment appeals, the affected counties will allow up to $50 million in credits against the future airline industry property tax liabilities. The $50 million is made available in five equal annual installments of $10 million each industry in fiscal year 1998-99. Los Angeles County anticipates that normal growth in airline industry values and the valuation methodology set forth in the bills will provide revenue increases that will more than offset the credits to be provided in future years as a result of these measures. SB 30 (Kopp) allows a county or city to enter into a settlement with a taxpayer to substitute credits against future tax liabilities. FISCAL EFFECT : Appropriation: No Fiscal Com.: No Local: No This bill is part of a legislative package that would codify a settlement agreement between counties and airlines regarding litigation and appeals of various assessments of aircraft and real property rights at airports. Many court cases and assessment appeals regarding the airline industry are currently outstanding. In aggregate, they involve millions of dollars in property tax for past, current, and future tax years. The large amount of tax revenue involved is evidenced by the $50 million in credits against future taxes which is specified in this bill. The actual revenue effect of the settlement package is indeterminate, since the eventual outcome of the pending litigation and appeals, if carried to conclusion, cannot be known. That is, the $50 million specified in the bill is probably substantially less than the amount of county losses should all current litigation be pursued. SUPPORT : (Verified 6/24/98) Los Angeles County San Mateo County Johan Klehs, State Board of Equalization member ARGUMENTS IN SUPPORT : The bill and its companions, SB 30 (Kopp) and AB 2318 (Knox), reflect a settlement package agreed to by 18 counties and 13 airlines, relating to valuation of commercial aircraft, and to the taxability of possessory interests in various airport facilities. These are issues over which the counties and airlines have feuded for many years, with neither side having confidence that its view will prevail should litigation go to conclusion. In the face of such uncertainty, and with little desire to spend the rest of their careers in court, the opposing parties have negotiated a broad agreement, including valuation standards which are agreed upon, and a schedule of credits against future tax. This is probably the most efficient way of resolving an essentially intractable problem. ASSEMBLY FLOOR : AYES: Ackerman, Aguiar, Alby, Alquist, Aroner, Ashburn, Baca, Baldwin, Battin, Baugh, Bordonaro, Bowen, Bowler, Campbell, Cardoza, Cedillo, Cunneen, Davis, Ducheny, Escutia, Figueroa, Firestone, Frusetta, Gallegos, Granlund, Havice, Hertzberg, Honda, House, Kaloogian, Keeley, Knox, Kuehl, Kuykendall, Leach, Lempert, Leonard, Machado, Margett, Martinez, Mazzoni, McClintock, Migden, Miller, Morrissey, Morrow, Murray, Olberg, Oller, Ortiz, Pacheco, Papan, Perata, Poochigian, Prenter, Pringle, Richter, Runner, Scott, Shelley, Strom-Martin, Sweeney, Takasugi, Thompson, Thomson, Torlakson, Vincent, Washington, Wayne, Wildman, Woods, Wright, Villaraigosa NOT VOTING: Brewer, Brown, Bustamante, Cardenas, Floyd, Goldsmith, Napolitano DLW:sl 6/24/98 Senate Floor Analyses SUPPORT/OPPOSITION: SEE ABOVE **** END ****